Margin Regulation and Stock Volatility

G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

Journal of Financial Services Research, 3 (December 1989) 153-164

Since 1934 the Federal Reserve Board has had the power to set separate limits on the amount of credit that can be extended to purchasers of common stock. There has been much recent debate about the efficacy of these margin regulations. This paper argues that the Fed has responded to increases in stock prices by raising margin requirements. The increase in prices has been associated with a decrease in volatility. There is no evidence that changes in margin requirements reduce subsequent stock return volatility. Also, trading halts have not had much effect on volatility in the past. Trading halts that were associated with banking panics were associated with high stock return volatility, but halts without bank panics were not associated with high levels of volatility.

Key words: Stock returns, Volatility, Margins, Trading halts, Circuit breakers, NYSE, Federal Reserve Board

JEL Classifications: G14, G18, E51

Cited 34 times in the SSCI and SCOPUS through 2020
© Copyright 1989, Kluwer
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